TO MUMBAI, WHERE I hosted IFR’s 2016 India ECM conference. And what a fabulous contrast to the gloom in Europe. A vicious ice storm had descended on London while I was on my way to Heathrow and the temperature plunged to an unseasonal 5oC.
Those Arctic blasts were a neat metaphor for the glacial regional economic outlook and the frosty banking news that just keeps coming: job cuts; miserable first-quarter results; sub-standard returns; product exits; country shutdowns; reduced trading volumes; and survival tactics for the era of negative bond yields.
Mumbai, by contrast, was an arresting 35oC on the morning I arrived; a fine metaphor for glowing optimism around growth and pretty much everything else.
Sentiment around India’s equity capital markets is very positive and the market is building up a tremendous head of steam. Following a poor start to the year for IPOs worldwide (with just a handful of Indian IPOs in Q1), I managed to pull together visible supply of close to 50 Indian flotations. If they price at the top of their phantom ranges, they could raise close to US$15bn.
And that’s just companies that have appointed or are close to appointing underwriters. It excludes those further back in the process and it excludes state-backed IPOs that may emerge as part of the US$5bn state disinvestment programme baked into the fiscal 2015–16 budget.
The government is persisting with its decidedly wonky sell-down strategy (including fees of just one rupee) that has already led to a number of deal failures. Most recently the IPO of Cochin Shipyard was sent back to the drawing board after not a single bank bid on it. But that’s a story for another day.
THE BREADTH OF private sector IPO candidates is amazing. Candidates hail from a range of industry sectors: healthcare companies are lining up from across the spectrum of hospital chains, diagnostics centres, medical tech, support services and pharma. Financial services providers are from the insurance sector (five companies in the pipeline), microfinance, banking and housing finance.
E-commerce, media and entertainment, automotive components, food production and retailing, infrastructure and logistics (including a series of newly created InvITs); real estate (REITs, also new to India); technology and business services are all represented.
A lot of the pipelined IPOs – as recently executed IPOs have been – will be sponsor exits. McKinsey noted last February that only US$16bn of US$51bn of principal capital deployed by PE firms in India between 2000 and 2008 had exited. Allowing for the lapse of time since the report was written, call it US$20bn. That still leaves a huge PE overhang that you’d imagine will need to come out sooner rather than later.
IN TERMS OF deal execution, one of the many things that struck me during discussions last week was the degree of self-assuredness displayed by Indian ECM professionals that domestic retail and institutional cash pools will be able to absorb increasingly large deals – beyond the US$50m–$80m size typical of institutional Indian deals – without the need to resort to international tranches or to target foreign buyers.
Domestic-only offerings aren’t just a function of investment banking bravado displayed by domestic houses. While some sector plays lend themselves better to local consumption, reducing the number of moving parts in a deal can help simplify price discovery and crystallise a market-clearing price more quickly. If there’s the depth to achieve good execution and garner after-market performance, why complicate life?
Getting deals over the line will continue to be a horses-for-courses process, though. The particular orientation of each issuer and industry sector will dictate syndicate and distribution strategy and deal structure. But a key takeaway is that promoters now have genuine choice and the latitude to price to the stickiest demand.
THE EVOLUTION OF India’s institutional investor base has helped underpin market optimism. Capital markets and disintermediation are catching on as assets under management grow to the point where institutional pools can start to do some of the heavy lifting around capital provision. And while the state banking sector works out its US$120bn NPL/stressed loan mountain, non-bank solutions will increasingly need to be part of the toolkit.
Optimism towards the domestic economy is a key underlying positivity factor. Growth forecasts for the 2016–17 fiscal year are as high as 8%, inflation is falling, the fiscal and current accounts are in better shape while levels of consumer spending are sound.
Having driven up sentiment through solid political rhetoric, market professionals in India continue to be broadly confident that the execution phase of Prime Minister Narendra Modi’s plans remains intact and realistic – notwithstanding political fractiousness around goods and services tax implementation and the success of the Insolvency and Bankruptcy bill.
Vodafone’s India carve-out could provide a litmus test of sentiment towards India as well as the depth of the country’s investor base. A lot has to happen at the corporate level before the deal can be cemented into the pipeline (including the outcome of the retrospective tax demand relating to Vodafone’s US$11.2bn acquisition of Hutchison Essar in India in 2007).
But at US$2bn–$3bn, it could be the largest-ever IPO out of India. Rothschild is advising and Bank of America Merrill Lynch, Kotak, and UBS were named as global coordinators on April 29. If India Capital Markets Inc can pull this off, it’ll be a game-changer. I’m back in Mumbai in the autumn. I can’t wait.
